- Jacob Goldman

A huge tax opportunity remains woefully
underutilized by America’s major real property managers. The
nation’s top seven real property managers are in charge of
over 9.2 billion square feet of real estate that is eligible
for approximately 16 billion dollars in EPAct tax
deductions. As mergers and acquisitions in the building
managerial industry soar these numbers continue to climb.
Despite being responsible for overall building management,
including making recommendations for energy efficient
equipment that substantially reduces operating costs, the
major managers have not, for the most part included EPAct tax
incentives into ongoing projects analyses. Utilizing big
data and mandatory benchmarking should be able to
optimize energy performance while generating substantial tax
incentives.
The top seven managers can still act and use an IRS Form 3115
(Change in Accounting) catch up procedure to capture any
missed incentives since January 1, 2006.

EPAct Tax Deductions

Pursuant to Energy Policy Act (EPAct)
Section 179D, building owners or tenants making qualifying
energy-reducing investments can obtain immediate tax
deductions of up to $1.80 per square foot.
If the building project doesn't qualify for the maximum $1.80
per square foot immediate tax deduction, there are tax
deductions of up to $0.60 per square foot for each of the
three major building subsystems: lighting, HVAC (heating,
ventilating, and air conditioning), and the building envelope.
The building envelope is every item on the building’s exterior
perimeter that touches the outside world including roof,
walls, insulation, doors, windows and foundation.
On December 19, 2014 President Obama signed the bill extending
the EPAct 179D Tax Credit for the 2014 tax year.

Current Look at the
Industry

Seven of the largest property managers and
their potential EPAct tax deductions are displayed in Table A
on the following page.
As you will see, the real estate holdings by the largest
industry players are quite substantial. Recent mergers
and acquisitions in the property investment environment have
substantially raised the bar for market share in the
industry. In today’s market you’re either a national
player or you’re not in the game. The latest rounds of
consolidation included international combinations of DTZ and
Cassidy Turley and Savills and Studly.
On a smaller scale, Cushman and Wakefield acquired Massey
Knakal Realty Services in New York. Also, global
equities and real estate brokerage BGC partners acquired
Cornish & Carey in Northern California and merged it with
its Newmark Grubb Knight Frank business.

Table A: *Note some
of the square footage amounts include non-U.S. buildings which
are not eligible for EPAct.

Other significant mergers are expected
within the near future as well. ExorSpa, the investment
arm of Italy’s Agnelli family has been rumored to be seeking a
buyer for Cushman & Wakefield. It has been valued at
$2 billion and reports say that China’s Fosun International is
considering a bid. No doubt, the magnitude of the EPAct
tax incentive opportunity should be attracting the attention
of even the largest global investors.

The Industry Promises
Expanded Services and Data Management

Facing increased competition, the real
estate industry is promising an expanded universe of services
and more sophisticated use of the data available to
large-scale managers. A well-known example is BGC Partners,
which recently purchased Newmark Knight Frank and Grubb &
Ellis. Howard Lutnick, CEO of BGC's parent company, Cantor
Fitzgerald, hopes to expand business by applying his firm's
financial expertise to the data accumulated through these
acquisitions.

LED Lighting

LED lighting is mainstreaming into
virtually all building categories, including office buildings
-- a prime facility category for the major property
managers. LED technology almost invariably qualifies for
EPAct tax savings, which can help meet payback period and ROI
investment criteria. Once installed, LED lighting drastically
reduces operating and maintenance costs for its users while
improving important aspects of lighting quality and safety.

The LEED Building Tax
Opportunity

The major managers proudly emphasize how
many LEED buildings they have. There are over 20,000 LEED
building projects in the United States, according to the U.S.
Green Building Council. Jones Lang LaSalle and CBRE have
at least 28 and 100 LEED buildings respectively. These two
property managers also have over 700 and 450 LEED Accredited
Professionals (LEED AP) respectively. LEED buildings by
definition are platformed for larger levels of EPAct tax
deductions since LEED buildings use the baseline of ASHRAE
90.1-2007, an improvement over the EPAct’s baseline of ASHRAE
90.1-2001.

Missed Benefits Can Be
Captured

Missed EPAct tax incentives can be captured
retroactively to January 1, 2006 (See IRS Revenue Procedure
2011-14). The major benefit of using this procedure is that it
does not require the filing of an amended tax return.
With EPAct, all qualifying retrofits and new constructions
completed after January 1, 2006 can be received immediately on
a current tax return.

Monetizing Building
Energy Benchmarking Data

As a result of mandatory and voluntary
building energy benchmarking, the leading managers are awash
in uniform and comparable building energy usage data.
Benchmarking takes energy utilization for a building and
compares this number with other similar property owners. A
building qualifies for an Energy Star rating if it is in the
75th percentile or better for similar buildings
nationwide. New York is one of the cities that mandates
benchmarking.
As part of Mayor Michael R. Bloomberg’s Greener, Greater
Buildings Plan, new legislation has been passed that among
many other measures, requires all of the city’s private
buildings of over 50,000 square feet to obtain benchmarking
and energy audits by specific deadlines. Although some
building owners object to the legislation, they should
consider the upside. Kate Grossman, chief operating officer of
New York City-based Greenwich Energy Solutions had this to say
about the issue: “These laws may seem ominous at first
because there is a cost to having these studies done, but they
were designed to give you information that allows you to make
cost effective choices and save money. None of the laws force
you to do anything—and that’s important for people to
understand. Once people see the savings possibilities, they
will just want to do these things .”

Like LEED buildings,
all Energy Star rated buildings make excellent EPAct
candidates. See the table below for a comparison among select
property managers for the number of buildings with the Energy
Star label. The leading property managers should have all
Energy Star buildings reviewed for EPAct tax incentives and
utilize the 3115 process to capture all previously missed tax
deductions.

Property Manager

Number of Buildings with Energy
Star Label

CBRE

316

Jones Lang LaSalle

160

Hines

159

Cushman &
Wakefield

96

Source: Energy Star Program

Conclusion

The large property managers are
sophisticated companies serving sophisticated clients. Billion
dollar tax incentives for an industry sector do not arise
often. Hopefully the real property management industry will
soon realize the magnitude of the EPAct tax incentive
opportunity and act on it.